Does the design of the Unemployment Insurance System increase labor market rotation in Spain?

Yolanda RebolloPablo de Olavide, Spain

The purpose of this paper is to identify the influence of economic incentives related to the design of the UI system on the individual employment and unemployment spells. Building on Spanish register data covering the whole labour market history of workers, we first analyse transitions out of jobs assuming that the incentives embedded in the UI system affect differently when the outflow from employment is due to a layoff that when is due to a quit. Secondly, those that enter the unemployment pool, are then subject to an additional transition rate analysis, either back to work to the same firm or to a different firm. We find that the UI system notably affect both, employment and unemployment duration. When the employees become entitle to receive unemployment benefits, the layoff hazard rate increases. Similarly, when the worker exhausts unemployment benefits the outflow from unemployment increases, and in certain cases, especially when the worker returns to the same firm. Hence, the UI system might favour labour market rotation in general, and in particular, the presence of temporary layoffs.